Capital Southwest Corporation

Ladies and gentlemen, please stand by. Your conference call will begin momentarily. Once again, ladies and gentlemen, please stay on the line. THE END THE END Thank you for joining today's Capital Southwest fourth quarter and fiscal year 2022 earnings call. Participating on the call today are Bowen Deal, CEO, Michael Sarner, CFO, and Chris Reberger, VP Finance. I will now turn the call over to Chris Reberger.

Thank you. I would like to remind everyone that in the course of this call, we will be making certain forward-looking statements. These statements are based on current conditions, currently available information, and management's expectations, assumptions, and beliefs. They are not guaranteed with future results and are subject to numerous risks, uncertainties, and assumptions that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Capital Southwest publicly available filings with the SEC. The company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changing circumstances, or any other reason after the day of this press release except as required by law. I will now hand the call off to our President and Chief Executive Officer, Brian Deal.

Thanks, Chris. And thank you, everyone, for joining us for our fourth quarter and fiscal year 2022 earnings call. We are pleased to be with you this morning and look forward to giving you an update on the performance of our company and our portfolio as we continue to diligently execute our investment strategy as stewards of real capital Throughout our prepared remarks, we will refer to various slides in our earnings presentation, which can be found on our website at www.capitalsouthwest.com. I'll start by saying that during tumultuous times like we have seen recently in the public markets, it's comforting to have a portfolio heavily weighted to first lean senior secured debt built with the full cycle underwriting mentality that we have deployed over the past seven years since the launch of our credit strategy. It is also comforting that 89% of our credit book is in sponsor-backed companies which provide these companies with potential capital and operating support if needed. On the capitalization front, we have been diligent about maintaining over half of our liabilities in unsecured debt while consistently raising equity through our cost-efficient equity ATM program. Finally, we are well positioned for a rising interest rate environment with 98% of our debt assets in floating rate securities and only 38% of our liabilities in floating rate securities. Now turning to slide six of the earnings presentation, we will begin with a summary of the key performance highlights for the fiscal year. Total return to shareholders for the fiscal year was 18%, which consisted of share price appreciation of 7% and total dividends paid during the year of $2.52. Our NAD per share grew 5% to $16.86 from $16.01 in the prior year, driven primarily by over $17 million in net realized and unrealized gains in the portfolio. During the fiscal year, we grew our total portfolio at fair value by 36% year-over-year to $937 million from $688 million in the prior year. while increasing our pre-tax net investment income by 6% to $1.90 per share from $1.79 per share in the prior year. Furthermore, we strengthened our balance sheet capitalization during the year through the opportunistic issuance of $150 million of three and three-eighths unsecured notes, approximately $100 million in equity proceeds raised through our equity ATM program, and $80 million in SBA debentures on which we are currently drawing. More alert in May, we received $45 million in additional commitments on our ING-led revolving credit facility. This now brings the credit facility commitment to $380 million. Michael will provide further detail on this later in our prepared remarks. On slide seven of the earnings presentation, we have summarized some of the key performance highlights for the fourth quarter of our fiscal year. During the quarter, we generated pre-tax net investment income of $0.50 per share which more than covered our regular dividend paid during the quarter of $0.48 per share. As previously announced, our board has declared a special dividend of $0.15 per share for the June quarter, which will be in addition to the $0.48 per share regular dividend also declared for the June quarter. This special dividend of $0.15 per share is a result of another successful equity exit and demonstrates our continued track record of distributing realized gains to our shareholders through special dividends. During the quarter, acquisition and financing activity in the rural middle market continued to be strong, albeit slightly below the record activity we saw in the December 2021 quarter. On a net basis, we were able to grow our investment portfolio by approximately $60 million, or 6.8%, to $937 million. Portfolio growth during the quarter was driven by $103 million in new commitments, consisting of investments in three new portfolio companies totaling $50 million, two refinancing transactions totaling $41 million, and add-on commitments in eight existing portfolio companies totaling $12 million. This was offset by $49 million in proceeds from four debt prepayments during the quarter. On the capitalization front, we raised $25.2 million of equity through our ATM program at an average price of $24.27 per share, representing an average of 150% of the prevailing net asset value per share. Additionally, we received approval for an additional $40 million of leverage from the SBA, increasing our total leverage commitment from the SBA to $80 million. As a reminder, the total leverage expected from our current SBIC license is $175 million. On slide 8 and 9, we illustrate our continued track record of producing steady dividend growth, consistent dividend coverage, and value creation since the launch of our credit strategy. We believe the solid performance of our portfolio and our company's sustained access to the capital markets has demonstrated the strength of our investment and capitalization management strategies. Maintenance and growth of both NAD per share and shareholder dividends remain as core tenants of our long-term investment objective of creating long-term value for our shareholders. Turning to slide 10 as a refresher, our investment strategy has remained consistent since its launch in January of 2015. We continue to focus on our core lower middle market lending strategy while also maintaining the ability to opportunistically invest in the upper middle market when attractive risk-adjusted returns exist. In the lower middle market, we directly originate and lead opportunities consisting primarily of first-line senior secured loans with smaller equity co-investments made alongside many of our loans. As of the end of the quarter, our equity co-investment portfolio consisted of 41 investments with a fair value of $85.2 million, which included $25.1 million in embedded unrealized appreciation for approximately $1.01 per share. Our equity portfolio, which represents approximately 9% of our total portfolio fair value as of the end of the quarter, continues to provide our shareholders attractive upside from growing lower middle market businesses. As illustrated on slide 11, our on-balance sheet credit portfolios at the end of the quarter, excluding our I-45 senior loan fund, grew 7% to $794 million, as compared to $745 million as of the end of the prior quarter. For the quarter, 100% of the new portfolio debt originations were first-lane senior secured debt. Finally, as of quarter end, 93% of the credit portfolio was first-lane senior secured debt. On slide 12, we lay out the $103 million of capital invested and committed to portfolio companies during the quarter. Capital committed this quarter included $49 million in first-ling senior secured debt committed to three new portfolio companies, including one in which we also invested $1 million in equity. Finally, during the quarter, we also committed $51 million in first-ling senior secured debt to nine existing portfolio companies. Turning slide 13, we continue our track record of successful exits with four debt investment prepayments. Two of these loan prepayments were refinancings related to acquisitions in which Capital Southwest was able to participate in the new credit facility. In total, these debt exits generated over $49 million in total proceeds, realizing gains of $512,000 and generating a weighted average IRR of 12.9%. Since the launch of our credit strategy over seven years ago, we have generated a cumulative weighted average IRR of 14.4% on 60 portfolio exits, representing approximately $695 million in proceeds. As previously mentioned, the market for acquisition and refinancing capital continues to be strong. Our investment pipeline, as we have mentioned on previous calls, remained robust throughout fiscal year 2022 on both volume and quality deals, and that trend has continued into the June quarter. Given the current activity we are seeing in the market, we expect the June quarter to again be a strong quarter for Originations. We are pleased with the strong market position that our team has established in the lower middle market as a premier debt and equity capital partner. On slide 14, we illustrate some key stats for our on-balance sheet portfolios at the end of the quarter. Again, excluding our I-45 senior loan fund. As of the end of the quarter, the total portfolio fair value is weighted 84.2% to first lien investments, 6% to second lien, and 0.1% to subordinated debt, and 99.7% to equity co-investments. Turning to slide 15, we have laid out the rating migration within our portfolio. During the quarter, we had no loans upgraded and one small loan position downgraded from a two to a three. As a reminder, all loans upon origination are initially assigned an investment rating of two on a four-point scale, with one being the highest rating and four being the lowest rating. And at the end of the quarter, we had 71 loans representing 95.3% of our investment portfolio fair value rated in one of the top two categories, a one or a two. We had six loans representing 4.6% of the portfolio at fair value rated at three, and one loan representing less than 1% of the portfolio rated at four. During the quarter, we had no new loans placed on non-accrual. As illustrated on slide 16, our total investment portfolio continues to be well-diversified across industries through an asset mix which provides strong security for our shareholders' capital. The portfolio remains heavily weighted towards first-lane senior secured debt with only 6% of the total portfolio in second-lane senior secured debt and only 0.1% exposure to subordinated debt. Turning to slide 17, our I-45 senior loan fund continued to generate solid performance. As of the end of the quarter, 97% of the I-45 portfolio was invested in first-lane senior secured debt. where the average EBITDA and leverage across the companies in the I-45 portfolio was $72 million and 4.2 times respectively. The material decrease in leverage this quarter was due to the exclusion of a loan position in one portfolio company that had negligible fair value in EBITDA. Had the stats for each of the December and March quarters excluded this portfolio company, Proforma leverage across the I-45 portfolio would have been 4.3 times and 4.2 times in each of the December and March quarters respectively. The portfolio continues to have diversity among industries and an average hold size of 2.4% of the portfolio. Leverage at the I-45 fund level is currently 1.59 times debt to equity. I will now hand the call over to Michael to review more specifics about financial performance for the quarter. Thanks, Ben.